Spread Betting Explained

Spread betting is a tax free (under current tax laws, they can of course change), cost effective alternative to traditional share trading. It allows you to speculate on the movement of stocks and shares without using a stockbroker, and therefore you do not have to pay commission or fees.

The best way to explain how Spread Betting works is through an example:

1. ABC Corp is trading at 1.59/1.60 and you think the price is going to rise in value.

2. You decide to place a buy bet so you buy ABC corp at 1.60

3. Since you are new to Spread Betting you trade the minimum amount of £1 per point.

4. You now have the equivalent of 100 Shares with a value of £160

5. Your margin requirement with CMC Markets for ABC Corp is 5% therefore £8 will be allocated from your account against this trade as initial margin. Remember if the share price moves against you, it is possible to lose more than this £8 initial margin.

6. You place a buy bet on Marketmaker® at 1.60 on ABC Corp at £1 per point.

7. Two days later you see that ABC Corp has risen to 1.85/1.86

8. Therefore you choose to sell at 1.85 and realise your profit.

9. You bought at 160 and sold at 1.85 which means ABC Corp rose by 25 points
   25 x £1 = £25 revenue.

10. You held the position for two days which means you incurred two nights financing charge. This is how you calculate the financing charge;

11. £160 (value of the position) x Libor + 3% (which in this instance = 8%) /360 (number of days in the year) x 2 (number of days position is held)
    = 07p

12. Therefore you deduct the financing from the total revenue and realise a profit of £24.93.

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